Running The Numbers On The Rock Cats Deal

Although I believe that a new ballpark in downtown Hartford would contribute to making the city more lively and attractive, I'm concerned with the financial feasibility of this move that will cost the city $60 million. As an area resident with family residing in Hartford, I have an interest in the city making the right decisions for its future.

In assessing projects where the investment is up-front and the payoff will be spread over many years, a commonly used tool is to compute the "net present value." Because a dollar today is worth more than a dollar next year, determining the net present value of both the investment and the returns will provide an apples-to-apples comparison. Using this method, I will attempt to clarify how the proposed stadium project could help or hurt Hartford.

A major error in this analysis results in a dramative overstatement of the revenues available to pay for the investment. The tax revenues (sales, income, hotel) goes almos entirely to the State, not to Hartford. The State is not supporting this move. Thus the analysis shows only about $10...

For these calculations, we need to decide the discount rate, or how much more a dollar is worth today than next year. Let's use a discount rate equal to the cost of capital, a municipal bond issued by the city, with an estimated yield of 5 percent. This is conservatively low, given that we are not considering the risk that the future revenue streams may not materialize as predicted. I will also consider only the projected revenues for the next 25 years, which is the duration of the proposed contract with the Rock Cats.

The financial returns to the city are said to be in the form of rent, a share of naming rights revenue and increased tax revenue. Below is the breakdown of the net present value for each of these revenue streams.

Rent

We've been told that the city will receive $500,000 per year from the Rock Cats for the first 15 years, and $600,000 from year 16 through 25. Net present value equals $7.07 million.

Naming Rights

We've been told that the city will receive half of the revenue from naming rights in excess of $50,000. What will these revenues be? A look at some comparisons within the league reveals a $3.5 million,15-year deal ($233,000 a year) for the Harrisburg Senators and a $2.25 million 15-year deal ($150,000 a year) for the Reading Phillies. Adjusting for inflation (estimated at 2.3 percent), and scaling to size, let's assume that annual revenue from naming rights will be $300,000 annually. Further still, let's assume that these payments will keep pace with inflation. Net present value equals $1.69 million.

Tax Revenue

According to Brailsford & Dunlavey, the consultants hired to assess the impact of the proposed ballpark, construction will produce a one-time benefit of $2.2 million in tax revenue, and ongoing operations will produce $1.7 million in tax revenue annually. I will also assume that revenue from operations will increase annually with inflation. Net present value equals $30.8 million.

Adding this up, we get a $39.55 million net present value return for an investment of $60 million. If we had added the cost of risk to the calculation, the return would be even lower. Furthermore, many have argued that the assumptions that support the estimates made by Brailsford & Dunlavey are extremely optimistic, and so future tax revenues may be lower.

Of course there are other anticipated benefits, such as the possibility of spurring new businesses near the park and adding new local jobs. Perhaps there are additional revenue streams that could be added to this, such as concerts and events, but I haven't heard what they might entail. Will these benefits be enough to make up the remaining $20.45 million (or more) shortfall that we've calculated here?

The issues raised in this analysis can help frame the public discussion on this important decision. Public officials need to answer the relevant questions. This is just one way of looking at this opportunity, but if we look at the facts in a structured way, I have faith that the city will come to a well-thought-out and right decision on whether or not to invest $60 million to bring the Rock Cats to downtown Hartford.

Andrew Campbell of Vernon got his master's in business administration from the Worcester Polytechnic Institute School of Business in May.